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Monday, 23 February 2015

Indonesia plans to create USD8bn mega-Islamic bank

According to the chairman of Indonesia's Financial Services Authority, Muliaman Hadad, the merger between the Islamic finance units of government-controlled Bank Mandiri, Bank Rakyat Indonesia and Bank Negara Indonesia, as well as a small unit of Bank Tabungan Negara, could happen as early as this year.

The idea behind the mega-merger is to create an Islamic banking institution that would be able to face the growing foreign competition in Shariah-banking in Indonesia through so-called "Islamic windows" of conventional banks, as well as to boost the currently quite small market share of Islamic finance in the country of about 5% four-fold to 20% by 2018, as per a forecast by the Indonesia Islamic Banking Association, bringing the share on par with Malaysia.

The new Islamic mega-bank would also be a catalyst for new products for retail customers and businesses and generally improve public awareness of Shariah-compliant finance. It would have lower operating costs and through its combined asset base would be able to finance larger infrastructure projects in the country, Hadad argued.

Together with a five-year roadmap for Islamic banking development drafted by Indonesia's Financial Services Authority, the new focus on Islamic finance should correct the imbalance between Indonesia's huge Muslim population and their low use of Shariah-compliant financial products and services. For example, while the number of Indonesia's Muslims is 12 times higher than Malaysia's - Indonesia also has the largest Muslim population of any country in the world - total deposits at Islamic banks are less than a sixth of Malaysia's, the Jakarta Globe cited official data. The roadmap thus plans to introduce clear new regulations on Islamic finance, as well as incentives to attract first-time investors to the Islamic finance market. It also will seek that the new mega-Islamic bank will integrate itself into the global financial system by bringing its risk management and capital requirements in line with international standards.

Compared internationally, with just $24bn, Indonesia's Islamic banking assets are currently just slightly above the UK's, where Islamic banking has grown impressively in the recent past and reached an asset base of $19bn as per 2014. They are also significantly lower than Saudi Arabia's ($260bn), the UAE's ($90bn) and Qatar's ($60bn). Malaysia's Islamic finance assets are worth around $115bn as of 2014.

With regards to foreign investors, Indonesia has already tested the appetite for sukuks, or Islamic bonds. In September last year, a US-dollar denominated $1.5bn sovereign sukuk had an orderbook comprising $10bn worth of bids submitted by foreign investors, having been more than 6-time oversubscribed. The huge demand for this bond has prompted the Indonesian government to come back with another sukuk issue as early as in the first half of 2015.

Economists also point at a regulation that requires conventional banks in Indonesia to separate their "Islamic windows" - or Islamic banking units of which there are more than 20 currently in operation by domestic and foreign conventional banks- into dedicated standalone institutions by 2023 similar to what the Qatar Central Bank asked conventional banks in Qatar to do in 2012. It is expected that this regulation will lead to a noticeable consolidation among such "Islamic window" units in the coming years in Indonesia.(Zawya / 22 February 2014)